Oracle sells ‘cloud’ but does ‘audit’

When Oracle reported their earnings for FY15 earlier this year, they were below market expectations and led to a sharp decline in the software giant’s share price. Oracle reported that Cloud revenue was up, but traditional software license sales looked weak.

While Larry Ellison tended to focus on the positive, and has stated that Oracle is truly a Cloud company, the results inevitably led some to question what Oracle will do to secure their business model. Oracle’s software licensing rules are complicated, but getting hold of the software could not be easier. Almost all of its software can be downloaded from the Oracle website by absolutely anyone.

In addition to this, none of the software requires a license key and using “premium” functionality (which requires a separate license) is easy. This is a dangerous combination. Practically anyone in an organization can download and start using an Oracle product, leaving the organization vulnerable to a huge unbudgeted bill when audited. Oracle has always been keen to exercise its right to audit customer use of its software. You might joke that, like winter in Game of Thrones, an Oracle audit is sure to be coming.

Some have accused Oracle of using its License Management Services (LMS) as a tire iron to beat down existing customers during audits so that the account manager could come in and ‘save the day’ by offering the missing licenses, usually with a fairly good discount, to solve any compliance issues.

In the vast majority of the cases, Oracle’s legal team wasn’t called upon during the process. Recently, there seem to have been some changes to this standard practice. According to an article in Forbes, Oracle has started to routinely use their legal department to send ‘breach notices’. A breach notice declares that a customer is out of compliance and needs to stop using Oracle’s software within 30 days (which is the standard notice period in most Oracle Agreements).

According to the report, Oracle Legal has been acting more aggressively to strong arm customers into buying more licenses. Another change is the shift in focus from selling traditional licenses to selling Cloud services. Like most companies, Oracle has a tendency to incentivize the sales of certain products to meet investor expectations.

This happened previously when Oracle was pushing Exadata machines after the acquisition of SUN. Sales were willing to offer higher discounts for software if the deal was combined with the sale of an Exadata machine, because they were compensated more on the hardware sale. The same is happening now, better deals are offered if they include Cloud products. A sales person is willing to offer a lot more discount on traditional licenses if the deal includes Cloud credits because the compensation on Cloud is so much better.

Sales are under pressure to hit Cloud revenue targets to give Oracle a credible story for investors. What does that mean for Oracle customers? Well, primarily there are two things to consider:

You’re still going to be audited, often. Oracle customers still need to know exactly what software is installed across the enterprise, how it’s being used and what Management Packs and Options have been activated. You can’t afford to wait for an audit to find out; it will cost more and as we’ve seen, Oracle is pushing harder for a speedy resolution to perceived compliance failures.

Use the push for Cloud licenses to get what you really want. Knowing that the Oracle sales rep is under pressure to sell you Cloud licenses can help you negotiate a better discount on any other software you want to purchase. The 22% support on the traditional licenses are based on the price after discount, so getting a higher discount has a yearly advantage. And even if you don’t actually use the Cloud, you can cancel the Cloud licenses after a year.

In the short term, Oracle’s focus is firmly on selling the cloud while continuing to use audits to ensure a steady flow of income from the existing customer base. Understanding this will help Oracle customers both avoid unbudgeted costs as well as get a better deal on the software they really need. The key is understanding what you have today and what you believe you will need tomorrow.

To speak with a Snow SAM expert and discuss how to optimize your Oracle licensing, contact us today.